Thursday, September 16, 2010

The Case for a "Repeal Amendment"

Okay. I PROMISE to (try and) get the next posting in the series on Say's Law of Markets and the real bills doctrine up Monday of next week. Really. I mean it. It's just that today's Wall Street Journal carried an editorial blaming the 16th Amendment for Congress's wild spending spree. Frankly, that's not so — and we have the evidence to prove it. Naturally we zipped off a letter to the venerable Journal which, 1) being too long, 2) questioning the analysis of a law professor and a politician, and 3) contradicting the worship of past savings, will not be published. As you will see, however, the letter is directly related to the current blog series:

Dear Sir(s):

Messrs. Barnett and Howell stated, "The 16th Amendment gave Congress the power to impose an income tax, allowing it to tax and spend to a degree previously unimaginable." ("The Case for a 'Repeal Amendment'," WSJ, 09/16/10, A-23.) This is incorrect on two counts.

One, the 16th Amendment did not give Congress the power to impose an income tax. It has always had that power. (Penn Mutual Indemnity Co. v. Commissioner, 32 T.C. 653 at 659 (1959).) The issue was whether an income tax could be levied without apportionment. (Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 158 U.S. 601 (1895).) In Pollock, the U.S. Supreme Court ruled that an income tax, previously construed as an "indirect tax" was, in fact, a direct tax and unconstitutional without apportionment. The Court thereby forced the repeal of the provision of the Wilson-Gorman Tariff Act of 1894 (ch. 349, §73, 28 Stat. 570, August 27, 1894) that would tax all incomes over $4,000 at the rate of 2%. The tax was intended to finance federal government recovery efforts from the (first) Great Depression resulting from the Panic of 1893. Wilson-Gorman followed the march of Coxey's Army on Washington to demand that Congress finance job creation.

Two, what allowed Congress to "spend to a degree previously unimaginable" was the hijacking of the Federal Reserve in 1916 to finance the buildup for the U.S. entry into World War I. The Federal Reserve was intended to provide an "elastic currency" for the private sector by rediscounting qualified commercial paper for agriculture, industry, and commerce. (ch. 6, 38 Stat. 251, December 23, 1913, 12 U.S.C. ch. 3) The Federal Reserve did not have the power either to discount or rediscount government securities, or to purchase such securities on the open market — except to retire the debt-backed National Bank Notes (ch. 58, 12 Stat. 665, February 25, 1863, amended 1864) and replace them with debt-backed Federal Reserve Bank Notes, which would in turn be replaced with private sector asset-backed Federal Reserve Notes as the federal government paid down its debt.

Politicians anxious to avoid raising unpopular taxes exploited the loophole to finance the war effort with debt and, later, the recovery from the post-war depression. It was not until the Keynesian New Deal, however, and the complete abandonment of Say's Law of Markets and its application in the real bills doctrine that the Federal Reserve became, in effect, the lender of first resort to the State, when it was never intended to finance government expenditures at all. Thus was Henry C. Adams's observation validated, that "Any method of procedure, therefore, by which a public servant can veil the true meaning of his acts, or which allows the government to enter upon any great enterprise without bringing the fact fairly to the knowledge of the public, must work against the realization of the constitutional idea. This is exactly the state of affairs introduced by a free use of public credit." (Public Debts, An Essay in the Science of Finance. New York: D. Appleton and Company, 1898, 22-23.)